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Tuesday, February 19, 2008

OCC's Response to Spitzer's Charge that the Bush Administration Worsened the Mortgage Crisis by Preempting State Laws

Last week, Brian blogged here about Governor Spitzer's claim that the Bush administration contributed to the mortgage crisis by preempting state attempts to bar predatory lending. Comptroller of the Currency John C. Dugan responded by issuing the following statement last Thursday:

Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem. Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.

However, comments from today assert that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders. That’s just plain wrong.

The OCC extensively regulates the activities of national banks, including mortgage lending. The OCC established strong protections against predatory lending practices years ago, and has applied those standards through examinations of every national bank. As a result, predatory mortgage lenders have avoided national banks like the plague. The abuses consumers have complained about most — such as loan flipping and equity stripping — are not tolerated in the national banking system. And the looser lending practices of the subprime market simply have not gravitated to national banks: They originated just 10% of subprime loans in 2006, when underwriting standards were weakest, and delinquency rates on those loans are well below the national average.

Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems. The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them. It defies logic to argue that preemption was an impediment. National banks are bound to obey the strict standards enforced by the OCC everywhere they operate – even in states that had far less rigorous standards. The states should have applied equally rigorous standards to the non-bank lenders that were responsible for the bulk of the problems.

I'm not sure who Comptroller Dugan means when he refers to "[a]lmost everyone who has paid attention to the subprime lending crisis" since he doesn't cite any sources (not that one would necessarily expect that in a statement of this sort). Here, by the way, is an excerpt from our casebook, written before the subprime crisis burst, that cites some relevant sources, though they cover an earlier time period than the one Comptroller Dugan is referring to:

One critic claims that national bank operating subsidiaries originated nearly a quarter of total subprime loans in 2003.See Baher Azmy, Squaring the Predatory Lending Circle: A Case for States as Laboratories of Experimentation, 57 Fla. L. Rev. 295, 359 (2005). See also Arthur E. Wilmarth, Jr., The OCC’s Preemption Rules Exceed the Agency’s Authority and Present a Serious Threat to the Dual Banking System and Consumer Protection, 23 Ann. Rev. Banking & Fin. L. 225, 314-15 (2004) (“most of the largest subprime mortgage lenders are nonbank affiliates of major bank holding companies. . . . a number of [national bank subsidiaries] have produced serious allegations of abusive lending practices.”).Preemption of state law as to nonbank subsidiaries is particularly significant because such subsidiaries are not routinely examined by federal regulators.GAO Report at 49, 51-53

Comments

The OCC's website does not list a single enforcement action since 2004 against Wells Fargo, Chase, HSBC or Citi relating to mortgage lending. This, despite 12 CFR 7.4008(b), which provides that "A national bank shall not make a consumer loan subject to this §7.4008 based predominantly on the bank's realization of the foreclosure or liquidation value of the borrower's collateral, without regard to the borrower's ability to repay the loan according to its terms. A bank may use any reasonable method to determine a borrower's ability to repay, including, for example, the borrower's current and expected income, current and expected cash flows, net worth, other relevant financial resources, current financial obligations, employment status, credit history, or other relevant factors." Perhaps the second sentence of the reg provides the out, but the first sentence sure looks bad in the subprime lending context (especially in hindsight).

I also wonder where the Comptroller gets his data. Subprime origination stats are available at www.nationalmortgagenews.com for 2006 and 2007. In most quarters the top ten subprime originators included Wells Fargo, Chase, HSBC and Citifinancial. Washington Mutual is protected by OTS preemption, so five of the top ten subprime lenders were out of the reach of state regulators. As far as the intolerance of OCC for predatory lending practices, a quick Google search for "Wells Fargo predatory lending" or "Citifinancial predatory lending" will turn up some considerable evidence to the contrary.